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Investing in Electricity, Growth, and Debt Sustainability: The Case of Lesotho
Author: Michele Andreolli and Aidar Abdychev
Series:
IMF Working Papers
Volume/Issue:
Volume 2016: Issue 115
Language:
English
Publication Date:
09 Jun 2016
DOI:
https://doi.org/10.5089/9781484385739.001
ISBN:
9781484385739
ISSN:
1018-5941
Pages:
42
Keywords:
WP; financing cost; depreciation rate; investment cost; concessional debt; GDP ratio; Lesotho GDP; policy instrument terms; Public Investment; Energy Production; Growth; Debt Sustainability; Fiscal Policy; cost share; energy sales; electricity market; debt terms; capital adjustment cost parameter; Electricity; Public investment spending; Consumption; Fiscal consolidation; Africa
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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This paper analyses a large public investment in a construction of a hydropower plant in Lesotho and its implications on the growth and debt sustainability. The paper employs an open economy dynamic general equilibrium model to assess the benefits of a large public investment through growth-enhancing increase in domestic energy supply and receipts from selling electricity abroad to ease the fiscal burden, which is often associated with big investment projects. During the transition (construction stage), various financing options are explored: increase in the public debt, increase in domestic revenue (fiscal adjustment), and combination. The calibration matches Lesotho's data and it captures the project's main challenges regarding the project costs. Moreover,the key remaining issue is the agreement with South Africa to purchase sufficient amount of electricity to allow the potential plant to run at a high capacity. We find that, the project can lead to sizable macroeconomic benefits as long as costs are relatively low and demand from South Africa is sufficiently high. However, the risks for the viability of the project are high, if these assumptions are violated.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund